Capital markets law overhauled: Part I

Author: | Published: 1 Jul 2005
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The foundations of the capital markets in Turkey were laid down during the 1980s but, since then, the development of the capital markets in Turkey has not been entirely satisfactorily for a variety of reasons. Macroeconomic and political inconsistencies, the shadow economy, high domestic debt stocks and interest rates obstructed the development of fully fledged capital markets with sufficient depth. The market also suffered from more specific securities problems, such as lack of a corporate and individual investor platform and lack of diversity in the capital market instruments.

On the other hand, the Turkish capital markets are poised to emerge. The high-standard legal framework of the capital markets in Turkey, along with the well-operating institutional structure of the Turkish Capital Markets Board, gives the Turkish capital markets potential for new developments that will lead to an increase in investment in securities. Recent developments, such as the introduction of private pension funds, also bolster the liquidity of the Turkish markets. Lastly, even the mere possibility of Turkey acceding the EU has triggered an influx of foreign capital.

The proposed accession of Turkey to the EU requires harmonization of domestic legislation with the EU legislation in many areas, including capital markets. This harmonization is not only vital for Turkey's accession to the EU, but is also necessary for Turkish capital markets to compete globally in terms of economic development.

While the regulatory authorities in the Turkish capital markets are working on integration to the EU legislation, the EU legislation is leading its way to a harmonized capital market within the EU member states. It is assumed that an integrated capital market throughout the EU will decrease the cost of capital and transaction costs, resulting in market growth and lower unemployment.

Representatives of the Capital Markets Board foresee that the amendments on primary and secondary capital markets legislation for purposes of integration with the EU legislation will be completed by the end of 2005.

The Law on Capital Markets 2499 is the main piece of legislation regulating capital markets in Turkey. In turn, the Capital Markets Board is the independent government authority regulating and monitoring the capital market activities through issuance of regulations and communiqués, which are in line with the Capital Markets Law.

Integrating the Capital Markets Law and EU legislation

The Ministry of Council's decision dated June 24 2003 sets out the primary steps required to be taken in many areas, including the capital markets, to adopt EU legislation.

According to this decision, harmonization of the capital markets legislation, particularly in the area of financial services, will be among the regulatory authorities' main objectives. Also, the regulatory authorities' supervision powers will be strengthened, making them structurally independent.

Another crucial amendment to the Capital Markets Law will be the abolition of the restrictions imposed on EU-based foreign investors that prevent them from investing in Turkish industries. Allowing public offerings of foreign securities in the Turkish market and loosening the restrictions on foreign financial service providers will facilitate integration of EU legislation into the Turkish finance sector.

The amendments that are envisaged for the Capital Markets Law can be summarized under seven headings. The amendments will relate to: (i) publicly listed companies; (ii) brokerage houses and their activities in the capital markets; (iii) corporate investors; (iv) private pension funds; (v) stock exchanges and other capital markets institutions; (vi) taxation in the capital markets; and (vii) effects of penalties and measures.

Publicly listed companies

As a result of the amendments to the Capital Markets Law, corporate governance principles will be widely applied by publicly listed companies. A Corporate Governance Principles Index will be used, whereby companies will be rated based on their compliance with corporate governance principles, and investors will be able to detect which companies are corporate governance friendly. Mergers and spin-offs in publicly held companies will be governed in compliance with EU legislation. Furthermore, the authority of the board of directors under the authorized share capital system to increase the capital of public companies will be limited to a maximum of five years. The scope of public disclosure in special cases will be extended and the voting rights of those that do not comply with the mandatory tender offer requirements will be suspended by court decision. Currently, persons who acquire 25% of the voting stock of public companies are compelled to launch a mandatory tender offer for the remaining shares. Lastly, the Capital Markets Board will be granted the authority to regulate the purchases of treasury shares, which is prohibited under the existing capital markets legislation.

Brokerage houses and their activities in the capital markets

Individuals will be entitled to be involved in capital markets activities within a framework to be determined by the Capital Markets Board. The activities in the capital markets will be divided into two groups, classified as primary and secondary activities.

Corporate investors

The antitrust drawbacks imposed on corporate investors will be abolished during the integration process.

Private pension funds

The restrictions imposed on the incorporators of private pension funds will be abolished and the conditions for incorporation of pension funds will be simplified. The principles for valuation of capital in kind invested in real estate investment trusts will be re-determined. Portfolio custody principles will be set out and the restrictions regarding securities that are traded by investment funds will be abolished.

Stock exchanges and other capital markets institutions

The Istanbul Stock Exchange and Istanbul Precious Metals Exchange will be reorganized to suit competition grounds that will be established throughout the integration process. The terms and conditions for quotations on the Istanbul stock Exchange will be reviewed and amended as per the terms and conditions of the EU member states. Lastly, the transition from physical shares to registered shares will become effective, which will lead to electronic record keeping of the shares of joint stock companies.

Tax in the capital markets

The tax system will be simplified, with a special focus on the taxation of foreign corporate investors. Government bonds that used to have tax advantages over corporate bonds will become subject to the same taxation principles as corporate bonds.

Penalties and measures

Measures for insider-trading activities will be harmonized with EU legislation. Public prosecutors will only be able to examine defendants and witnesses in the presence of supervisors from the Capital Markets Board. Those who engage in capital markets activities without obtaining the required permits will become individually subject to bankruptcy proceedings. It has also been stated that monetary penalties will apply to financial crimes. The Capital Markets Board will be granted the authority to request from the courts the deposition of joint stock company directors who infringe the relevant laws and regulations and will be entitled to request that the courts appoint new directors. The Capital Markets Board will further be granted the authority to fine those that fail to fulfil the public disclosure requirements imposed by the Capital Markets Law. And new penalties will be incorporated with respect to joint stock companies that proceed with public offerings without fulfilling the Capital Markets Board's registration requirement.

Ayse Tumerkan will continue this outline of capital markets law reform in next month's IFLR.